MEG Energy Stock Jumps on Potential $5 Billion Husky Deal

MEG shares sparked by takeover bid.

Canadian oil producer MEG Energy (MEGEF) shares were surging over 30% in morning trade as Husky Energy (HUSKF) announced plans to acquire the company for $5 billion. Husky's stock declined.

Calgary-based Husky proposed a C$6.4 billion ($5 billion) deal for its chief rival, which it will offer directly to shareholders of MEG. The deal would have offered a 37% premium on MEG's Friday closing price to shareholders, but that has been quickly eclipsed.

"The combined company will have total Upstream production of more than 410,000 barrels of oil equivalent per day (boe/day) and Downstream refining and upgrading capacity of approximately 400,000 barrels per day," Husky said in a statement.

Despite the market reaction, MEG has not warmed to unsolicited offer.

"MEG Board of Directors has refused to engage in a discussion on the merits of a transaction, giving us no option but to bring this offer directly to MEG shareholders," Husky CEO Robert Peabody said.

When asked why MEG was not ready to come to the table on the deal in an investor call this morning, Peabody offered no speculation on their refusal.

Since the deal will go directly through shareholders, it is not subject to any approval conditions or due diligence. Husky expects the deal to come to fruition in the first quarter of 2019.

"We don't expect this deal to have too many hurdles," Peabody said, explaining that he feels regulators in Canada will be comfortable with the terms of the deal should shareholders approve.

Kingmakers in China

As The Deal pointed out this morning, a decision on the deal could be decided far away from the oil fields of Alberta. Husky energy is 70% owned by holding companies of Hong Kong-based billionaire Li Ka-Shing, while MEG's biggest shareholder is Chinese oil leader Cnooc (CEO) .

Cnooc is a significant player as it is a company that has partnered with Husky in projects in China and Indonesia, and presents a logical bridge between the two companies. The Beijing-based energy company owns 12% of MEG shares.

"Cnooc is a great partner of ours, we've got a lot off great connections with Cnooc," Peabody said in the conference call this morning. "Certainly, it's a company that I would hope would find the deal is just as compelling as I would all shareholders looking at it."

Closer to home, Boston-based hedge fund Highfields Capital Management has been a disgruntled activist as of late.

Daniel Farb, the firm's managing director, left a seat on the board just three months ago marking a protest against what he deemed a failing strategy on the part of the MEG board.

His firm may also be key in making sure the deal is agreed upon, given their 10% stake in MEG.

Timing Is Everything

The deal comes at an opportune time as NAFTA negotiations have reportedly ended positively for Canadian prime minister Justin Trudeau and global oil prices are beginning to recover.

A renewal of an open trade relationship with the United States might be able to take some pressure off of Canadian producers, which could have little afforded more impacts on their industry.

79% of Canadian oil production is sent to the U.S. according to National Resources Canada, which makes the U.S. trade absolutely pivotal to any Canadian energy company, but especially to those that are looking to pursue mergers and acquisitions.

More details on the Canadian and American trade agreement will come this morning as President Trump hosts a press conference at 11:00 a.m.

News conference on the USMCA this morning at 11:00 - Rose Garden of White House.

To be sure, Canadian oil has so far traded at a severe discount to its peers, charting just over $30 per share on the Western Canadian Select index when compared to the OPEC basket, which has hovered around $80 in recent days. Oil industry experts have blamed infrastructure and supply issues for the disparity.

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